CAD troubles: Is coal set to become tomorrow’s new gold?

Walk into any port in India and you will be treated to a familiar sight. Rows and rows of containers, lines of cars waiting to be exported, mounds of coal and wheat scattered around in open spaces and oil tanks with crude oil meant to fuel India's rise to economic glory. This is not surprising.

Ports around the world will present asimilar sight. Imports of crude oil, gold, fertilisers and pulses keep the infrastructure at most ports busy. India's yawning current account deficit is testimony to the country's hunger and need for imported goods.

At 4.8% of GDP (2012-13), the deficit is at a record high, forcing the government to take action. Last Wednesday's move to impose capital controls may not hurt Indian businesses so much — it is a blow for small and medium-sized firms — but it sends a clear signal about North Block's determination to cut the deficit to about 3.7% of GDP by the end of 2013-14.

There is only one problem, however. The import boom is unlikely to abate soon and will probably get worse. Finance ministry officials are confident that their measures to tamp down imports will succeed but the evidence so far is not encouraging.

India's gold consumption rose to 310 tonnes in the April-June quarter, the highest in 10 years, despite import restrictions and a hike in duties. The July data is even more worrying. Despite the June hike, Indians imported more gold in July over June: $2.9 billion versus $2.45 billion.

It is not clear what impact another hike in July will have and the World Gold Council is confidently forecasting annual imports to be either the same or slightly higher than last year's 950 tonnes.

The obsession with the yellow metal is natural, but there is another equally ominous development lurking on the horizon: the slow, inexorable rise in coal imports. India imported around $14 billion worth of coal last year.

This year, the figure is expected to be higher: more than $15 billion. As power capacity increases and Coal India (CIL) falters in its attempt to increase production, the volume of the black gold imported into this country is only going to increase.

Projections by the Economic Times Intelligence Group (ETIG) show that the country will need about 177 million tonnes of coal by 2014-15, up from about 156 million tonnes in 2013-14. If domestic supplies fail to keep pace with demand, imports are expected to surge to about 223 million tonnes by 2016-17.

The value of such imports will obviously depend on coal prices and the exchange rate. International coal prices have come off their highs recently but could well strengthen if India's surging demand coincides with a global recovery. The government needs new ideas and fresh thinking to handle this problem. One way out is to increase domestic coal production, but that will only be possible with private sector involvement. CIL's inefficiencies and problems are well-known and aburst of private sector entrepreneurialism and energy is what is needed to increase production.

Given the inevitable politicisation that will surround the move, the government could take the following steps. First, sell it as a pro-growth, projobs, pro-poor measure. It should not be seen as benefiting a few companies. Second, involve local politicians, MLAs, MPs and NGOs in coal-bearing districts and convince them of the need to do this.

It is not always going to be easy. A genuine reach-out could win some converts while softening the hostility of others. BJP leader Yashwant Sinha told a meeting in Mumbai last year that politicians could get involved in convincing locals to part with land if the price is right.

Third, unlike oil and gas, ensure that CIL is not forced to part with its prized blocks and that the whole exercise does not descend into profiteering at public expense. Fourth, all measures should be taken to ensure that the environment is not affected in a major way and that forest land is not usurped.

State governments must be involved to provide land for forests nearby if forests are needed for mining. For years, we did nothing about our oil production, allowing the dependence on imports to increase. We shouldn't repeat that mistake in coal. Three years later, if the currency comes under pressure again due to the rising current account deficit, it may be too late. Unlike the "barbarous relic" gold, banning or chiding companies will not work. After all, coal is not an unproductive asset.